Expert: Paul Henneman - 6/30/2005

Question
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Dear Paul,
Thank you so much for the very detailed answer. After a few days to really think this over I have decided to leave my money in Fidelity. I was on their website and I found out they have a tool that analyzes my portfolio and makes suggestions on what stocks and mutual funds to sell and invest in. I have lost a bundle on that Ford stock and I just wish it would rebound a little and maybe I could get at least half of it back. It will be really hard to part with it, knowing how much I have lost on it.
The plan right now is to leave the money where it is and then when I turn 65 maybe invest in some kind of fund that will pay a monthly check to suppliment my pension or social security.
Thanks so much for the advise.
Hector

Followup To
Question -
Dear Paul,
I am a retired autoworker living on a pension. I am 53. Before I retired I managed to save a few dollars in a 401k. As of today it's only worth 56,000, but it's all I have saved. Here is my delema, an insurance agent suggested that I rollover all of it into a Phoenix Annuity. I have been trying to read up on annuities and still don't know what to do. Right now my money is parked in Fidelity Investments and split between 3 mutual funds, Ford stock and a bond fund. The real loser so far in all of them is the Ford stock. What are your thoughts on variable annuities? Should I rollover into it? I am very nervous and leery of the whole thing.
Thanks,
Hector

Answer -
Hector,
   Thank you for your question! Yes, you are right to be nervous about that advice. I would not recommend that you do anything that an insurance agent suggests to you. An annuity will provide little value to you. They are really more insurance products than investments. Stay away. They are really very silly products, designed to sell the insurance that is tied to them. Very low yeilds. Your money is best used elsewhere, my suggestion would be to let this insurance agent know definitively that you are not interested or he will continue to give you the hard sell. I would not suggest getting into a discussion why with him, they can talk great circles.
    Now, what instead to do with your funds? Actually, I am impressed with where you are currently. Mutual funds sound to me like your best fit considering your current position. Stocks can be excellent, but require a great amount of research and time. If interested, let me know and I can provide some good materials to get you started. I agree that Ford is probably not a stock you should be holding. I would consider getting rid of that and putting the funds into another mutual fund.
   The key to successful mutual fund investing is diversity. Most funds actually invest in the same stocks, so even by holding several funds you may not be diversified. Check into what the focus of these funds are, not just their performance record. There are great funds out there that specialize. You could for example hold an index fund that follows general markets, a real estate focused fun, and perhaps a technology fund, and health care fund.  A great place to do fund research is www.morningstar.com, they are the best know source for mutual fund information. General google search will also help, and Lipper is another company that offers mutual fund data. Research a fund like you would a stock. Look for long term growth, a single recent year or two of great performance lulls many investors in, but if the fund did very poorly other than the most recent year, it could easily revert to that lower performance. Always look long term.
   To sum up: I think mutual funds are the place you should be. Take control and research them. Make sure you are in some diverse funds. I would suggest getting out of the Ford, and putting that into mutual funds as well. Perhaps you could begin researching and finding a few stock plays, but never more than 10% of your portflio in that for the first few years until you gain confidence. Even then I would not put more than 25% directly into stocks. And never one single stocks, always hold several. If you are considering auto stocks, we like Volvo. Interesting that the car division of Volvo is now owned now by Ford of course, but the Volvo stock (they still build commercial vehicles on their own) has more potential. Ticker is volvy.
   Should you wish to proceed with the annuity, some advice on what to look for. The stability of the insurance company that is offering the annuity is very important. Its financial stablity should be your primary concern. There is 'Bests Ratings', this is a rating assigned to insurance companies by an independent organization. Look at this as an indicator of whether or not the insurance company can meet its financial obligations.  Standard and Poors also provides ratings of insurance companies. Also look at the historical returns the company has paid out on the annuities, and the fees and commissions paid to the salesman. Keep this in mind, the insurance agent trying to sell you the annuity is looking for the healthy commission he gets!
   I hope this helps! Please do not hesitate to follow up with me if I can be of any further assistance, and I wish you the best!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
(800) 381-5576


Answer
Thank you Hector for follow up! I would like to offer one more suggestion on the way you are thinking about your Ford stock. The major thing that seperates individual investors from professional investors (and why professionals are able to generate so much more income from stocks) is the ability to eliminate emotins from investment decisions. Do not stay in Ford to try and regain some of your losses. Only stay in Ford if you honestly think that it will go up in stock price. The main argument here is that you want to earn your losses back. It may very well be that you have a much better chance at doing this if you take the remaining funds and put it somewhere else.  You should always look at your investments as to how to most optimize your current funds to grow in the future. To make decisions based on past performance could do you in!
This is not to say that there is not potential in Ford, I never make individual stock recommendations because each investor is different. You may decide that Ford has good financials and the prospects are good that the stock will rise. But I strongly recommend that you look at it as objectively as possible regarding the future prospects of the stocks performance.

Best of luck and regards,

Paul Henneman
President
ValuEngine, Inc.
www.valuEngine.com
www.VEInstitutional.com
(800) 381-5576